Avoid margin calls in an uncertain environment
Volatile sharemarkets become a scarier proposition for those that have geared into the market.
Here are some tips that you may find useful in avoiding a margin call:
1. Avoid borrowing up to the maximum loan to valuation ratio (LVR) permitted by your margin lender and ensure they apply at least a 5% buffer to the LVR before making a margin call.
2. Avoid being exposed to one or two stocks. Diversify your portfolio across a range of sectors, which will help limit the extent of fluctuations in your portfolio.
3. Pay off the interest on your margin loan rather than capitalising interest.
4. Reinvest your dividends to increase your portfolio or reduce your loan.
5. Have a defensive strategy.
In uncertain market conditions (for example, now), either reduce your level of gearing, move to defensive stocks and / or consider gearing into conservative managed funds.
Additionally, always remember to budget to have available cashflow to meet margin calls. It would also be helpful to perform some basic scenario analysis to see how far your stocks would need to fall in order for a margin call to be triggered.